When Bristol-Myers merged with Squibb in 1989 to create the Bristol-Myers Squibb (NYSE:BMY) with which we are familiar, it was the second-largest pharma company. Now it is a number of rungs down the list as measured either by sales or profits. This decline reflects three things. One is that BMS has done a "string of pearls" set of small acquisitions this century, focused on biotech. Another is its lack of engagement in large M&A deals, unlike such worthies as Pfizer (NYSE:PFE) and Merck (NYSE:MRK).
A third reason is that in the '90s, BMS began to suffer a virulent form of the disease that began afflicting the Big Pharma industry as a whole, namely unproductive R&D.
When BMY was trading in the mid-$70s in 2000 and 2001, it was doing about $19+ B in annual sales. The stock is still in that same range, and analysts have been projecting about $18 B in sales this year and $20 B next year. In other words, no growth in 15 or more years. Given the pace of pharmaceutical inflation, that's really shrinkage. EPS in 2001 was $2.41, which is very close to the midpoint of the range that the company was projecting as this year began. So, again, no growth, and shrinkage adjusting for inflation.
Now, BMY is close to a pure play in biotech/biopharma, and is getting a P/E that exceeds that of the traditional biotech/biopharma incumbents I follow, except for Regeneron (NASDAQ:REGN).
This article initiates coverage of BMY, then reports on the Q1 results.
Introduction to today's BMY
The 10-K conveniently lists on p. 3 the major products and minimum expected protection from generics or biosimilars.
Of this group, the only product that would clearly not be a biotech/biopharma product is Abilify, which is near the end of its global life cycle. Whether Eliquis, a novel oral anticoagulant that competes most closely with Xarelto, is a biopharma product or not is not a critical point. A biologic product receives 12 years of protection from biosimilar competition from the FDA even in the absence of a patent. Patents usually protect the product beyond 10 years, though. Also, the biosimilar process does not at this point translate into a sales drop that approaches 100%, as occurs routinely with small molecules. This gives biologics a much longer and stronger tail sales and profit period than small molecules when competition appears.
Of the many ways to analyze this stock, I'd like to focus on three themes. In order, these are the:
- major marketed non-immuno-oncology products
- IO products - Opdivo and Yervoy.
The conclusion I'm going to come to is that with two of these three bullet points unimpressive, I look at BMY as a biotech to follow with a lot of interest but not a buy right now, solely on valuation grounds. But I like this company now and consider it as one of my core biotech/biopharma group of stocks that I follow.
As part of initiating coverage, I'll take the non-IO drugs one by one, as presented in the 10-K. Note, the 10-K discusses these products or product lines on pp. 4-6 of the 10-K, so I'll describe them only briefly
This is an oral, small molecule drug. It's open to generics in the US; it loses regulatory exclusivity in all parts of the EU and in Japan this year. So, the present value of this hepatitis B drug is much lower than the $1.3 B total revenues it earned in 2015 would suggest.
Global sales were down to $291 in Q1 of 2016 and minimal in the US.
Hepatitis C franchise
This is primarily Daklinza, also in some regions Sunvepra, a protease inhibitor that when given with Daklinza is effective for some forms of HCV disease. There is an opportunity in China for BMY, where it is hoping for approval in competition with Gilead (NASDAQ:GILD), AbbVie (NYSE:ABBV) and J&J (NYSE:JNJ).
Sales of this sector were up 62% yoy in Q1 to $427 million.
I have to assume that the novel pan-genotypic combos, especially SOF/VEL from GILD, are going to seriously harm this franchise.
The core here is BMY's atazanavir, for HIV/AIDS. It's given orally alone as Reyataz or boosted with GILD's Tybost (cobicistat), the combo being called Evotaz.
We are looking at loss of regulatory protection between 2017-9 in all four major markets, namely the US, EU, Japan and China.
Sales of the Reyataz franchise were down 25% yoy in Q1 to $221 MM.
This includes Sustiva and BMY's revenue share of GILD's triplet drug Atripla for HIV/AIDS. Sales were $1.25 B last year, down $0.2 B from 2014. Exclusivity has been lost since 2013 in the EU, and the drug is scheduled to go generic next year in the US.
Per p. 68 of the 10-K (p. 70 of the PDF), there is a complex deal with GILD for compensation to BMY for sales of Atripla when Sustiva goes generic, which I assume will be next year in the US.
Global sales of the Sustive franchise were down 6% yoy in Q1 to $273 MM.
This is a new antibody product, co-developed with ABBV for non-frontline myeloma treatment.
Sales were $28 MM in Q1 (US only). This is a reasonably good initial launch given intense competition in myeloma - but there's much more competition coming.
This is a fading antibody product, initially developed by ImClone, now part of Lilly (NYSE:LLY). BMY now receives royalties on sales.
BMY has no more interest in US sales of Erbitux; ex-US revenues to BMY in Q1 were $165 MM.
This is an important product. It is an oral treatment for certain forms of leukemia. BMY owes royalties to Japan's Otsuka (OTCPK:OTSKY) on Sprycel sales. Sales to BMY were growing and reached $1.6 B last year, up from $1.5 B in 2014. How much of that increase was due to price is not known to me at this point.
Revenues from Sprycel were up 9% yoy in Q1 to $407 MM.
A big winner for years, its revenues have been cratering and were down to $33 MM in Q1, a yoy drop of 94%. I expect that BMY is going to cease breaking Abilify sales out separately.
This biologic for rheumatoid arthritis has been a successful entrant in the increasingly crowded RA field. Sales reached $1.9 B last year, up strongly each of the past two years. Revenues in Q1 rose 19% yoy to $475 MM. There is immense competition in RA treatments. Assuming that the major worldwide launches of Orencia are now complete, I'm therefore going to assume much slower growth for this product after this year. But only time will tell, as rheumatologists winnow some products in and some out based on their real-world experience, which can be different from what the label teaches.
This is a great product with a bright future. It's a small molecule given orally twice a day as a "blood thinner." It competes directly with Bayer's (OTCPK:BAYRY) Xarelto, which is marketed in the US by J&J.
Sales of Eliquis neared $1.9 B in 2015, up very sharply from 2014.
Sales of Eliquis then continued the momentum, and more than doubled in Q1 to $734 MM.
Eliquis has the marketing disadvantage that it is given twice a day, whereas Xarelto has just long enough activity in the body to be approved as a once-daily medicine. The company did a Phase 1 study of a modified-release version of Eliquis in 2009, but that's all I can find in the Clinical Trials registry that the government maintains.
An inter partes review request for the apixaban composition of matter patent in the US was received by BMY last August.
BMY required sales help to make Eliquis a big success, even though it is the original discoverer of the drug (apixaban). It therefore did a deal with Pfizer. PFE funds most of the development costs and splits profits equally with BMY in most of the world. This arrangement is material to understanding BMY's profits from Eliquis, and is discussed on pp. 67-68 of the 10-K.
For example, in 2015, net product sales of Eliquis were $1.85 B. BMY then paid $910 MM to PFE.
So, while sales are very large and growing rapidly, Eliquis is much less important as a driver of profits than one would think by looking at sales without understanding the PFE arrangement.
Overall, though, this is a great product with substantial further upside. It's a shame for BMY shareholders that the company was no longer large or strong enough to do the global product development and promotion itself, thus cutting PFE into the riches in such a large way. However, half of a very big loaf beats 100% of a small one.
Management deserves accolades for developing this medically and commercially important product.
Eliquis is a true, major growth product, but not very profitable on the basis of sales booked to BMY. Nonetheless, assuming it survives the IPR at the Patent Office, it has a number of years before it goes generic, and maybe the company can come up with a good once-daily version.
Empliciti is very young in its growth path. Sprycel is mature and solid, and Orencia is strong and profitable but has intense competition.
The rest of the franchises are mature or declining.
In the aggregate, there is nothing in BMY's non-IO product portfolio that justifies its mega-cap status.
Before getting to the key IO franchise, next up is a quick look at the pipeline.
BMY's pipeline - not much in Phase 3
This link is to the current BMY web page that lists the status as of Jan. 1, so it may not be completely current.
Except for marketed products for which an additional indication is being sought, there is only one Phase 3 project, and it's an in-licensed IO candidate called Prostvac.
It would be overkill for this article, which is long enough, to get into the pipeline. What's key is that it has a focus on IO products.
The lack of any internally-developed Phase 3 projects in conjunction with the presence of only one in-licensed Phase 3 project appears to leave Opdivo and Eliquis for the most part to carry the valuation load for some time to come.
I'm getting this article out before the conference call. The Q1 press release does not mention any important late-stage pipeline progress. If anything material is divulged in the conference call about the pipeline, I'll try to get an InstaBlog out on it for the record.
In any case, at $71 and a valuation close to $120 B, while BMY is a strong company based on its marketed products discussed above, the current valuation implies a lot of reliance on the IO drugs, which is why I went through this presentation in this order.
BMY and the immuno-oncology opportunity
Our immune system not only fights off germs that threaten us, but it has the capacity to kill cancerous cells. Many cancers that get large enough to come to clinical attention have found ways to prevent the immune system from noticing and killing the cancer cells. While this fact has been known for many years, we are now in the era in which IO is effective and being tested in a growing number of cancers. Broadly speaking, IO fights the ways in which cancer pacifies the immune system and/or enhances the immune system's response to the cancer.
IO is now a very hot field.
Now let's look at BMY's two leading IO products.
Yervoy received FDA approval in March 2011. Yervoy is a monoclonal antibody for advanced melanoma (an aggressive skin cancer); it is also approved to prevent recurrent melanoma following surgery.
Yervoy has a number of immune-mediated side effects, which can be severe and even fatal; it has a black box warning about them.
Yervoy's sales were about $1 B in 2013, $1.3 B in 2014 and $1.1 B in 2015 - a flat trend. In Q4, worldwide yoy sales were down 28%, from $366 to $265 MM. While sales may rebound for one reason or another, it would appear to me that Yervoy is too toxic to become much of a growth engine if at all.
Yervoy's sales were down 19% yoy to $263 MM in Q1, though they were up 10% in the US. Some of the worldwide decline was due to forex movements, but this disparity is something to watch. Normally, prescribing trends end up being similar in the EU and US.
While Yervoy is going to produce some nice profits over the years for BMY, it is not nearly enough to justify a mega-cap valuation for BMY, even when added to the list of products discussed above.
That leaves a heavy weight on the Big Dog:
Opdivo carries the load (and delivers in Q1)
Introduction to Opdivo
Opdivo is a monoclonal antibody that was approved by the FDA in December 2014. It is very similar in its mode of action to Keytruda, a Merck antibody which was approved just ahead of Opdivo. Opdivo is ahead of Keytruda in sales, due in good measure to a less targeted approach to cancer and an additional indication in renal cell carcinoma. These antibodies are checkpoint inhibitors. A schematic of this type of therapeutic agent is provided by the Dana-Farber Cancer Institute in a web page called What Is a Checkpoint Inhibitor:
Checkpoint inhibitors block normal proteins on cancer cells, or the proteins on the T cells that respond to them.
A more technical schematic comes from the NCI.
In that web page, which is in Q&A form, one snippet from is especially relevant:
The first approved checkpoint inhibitor, ipilimumab (Yervoy®), targeted CTLA-4. But it seems like the momentum has shifted toward anti-PD-1 and anti-PD-L1 inhibitors. Why is that?
First, the side effect profile of anti-PD-1 and anti-PD-L1 drugs is much better. Patients tolerate them better, so they can remain on therapy longer.
In addition, with ipilimumab we rarely see rapid regressions...
With the anti-PD-1 and anti-PD-L1 therapies, however, we're seeing very rapid responses. That's because these drugs primarily act on primed T cells that are already at the tumor; their sleeves are rolled up and they're ready to go but they're being blocked. Then we take the blinders off with these drugs and the T cells can now attack the tumor.
Those two factors are making a world of difference.
Opdivo's worldwide sales were $942 MM in 2015. However, in Q4 its sales annualized at $1.8 B, and that's with the great bulk of revenues coming from the US. I have seen a prediction that sales of Opdivo will be $8 B in 2020.
Worldwide Opdivo sales indeed are on that trajectory, based on Q1 results. US Opdivo sales rose yoy from $38 MM to $594 MM. This is wonderful progress. The global launch is just getting going, with WW revenues rising from a minimal $2 MM last year to $110 MM this year.
Opdivo "makes" BMY for years to come.
Competition in IO
This is going to be intense. MRK is pressing forward with Keytruda. The entire industry is all over this field. A prominent competitor is MEDI4736 from the MedImmune subsidiary of AstraZeneca (NYSE:AZN), which is discussed in many accessible articles, such as the one I found from last July that includes this title and intro:
Amid fierce rivalries over the latest generation of cancer treatments, drugmakers have been weaving a complex web of collaborations on combination therapies spanning much of the pharmaceutical industry. As the true significance for patients of molecules that recruit or rescue immune functions to destroy tumors is becoming clear, their developers continue to seek ideal partner drugs.
The companies leading the immuno-oncology charge believe combinations will bring the long survival durations their treatments offer to wider patient groups. With analysts forecasting that total annual revenues from immuno-oncology drugs will reach around $20-30 billion (£13-£19 billion) within a decade, these collaborations will help other firms to cash in too.
This is great stuff for patients and the companies that succeed, and that sales range of $25 B give or take $5 B is hardly set in stone. Success in R&D in IO, or relative lack of such, and the degree of price flexibility, are going to determine how large this field really is.
Brief comments on Q1 results
BMY had a strong quarter despite flat yoy EPS comparisons of $0.71 per share. Q1 top line data were:
2016 2015 Net product sales $ 3,964 $ 3,059 Alliance and other revenues 427 982 Total Revenues 4,391 4,041
BMY has a number of alliances; see the 10-K for discussions of them. Overall, I think that the Street is going to focus primarily on net product sales and most specifically on where Opdivo is going.
The company has raised its EPS guidance for this year from $2.35 to $2.42 (GAAP). I'm going to assume that it intends to raise guidance every quarter, so for discussion purposes, I'm thinking of $2.60 as the "real" number for 2016 GAAP EPS. Since I'm expecting Opdivo and Eliquis to drive "beat" after "beat," I'm interested in buying a playable dip in BMY if I get the chance.
The company reviews its presentation of risk factors in the 10-K and elsewhere. I would highlight competition, valuation and the pipeline's general lack of late-stage molecules as pertinent risks to initiating a position in BMY here.
Concluding remarks - BMY has done a great job; the Street knows it
About 15 years ago, when someone asked me about BMY stock, I launched into a lecture about its R&D failings and why the stock should be avoided. The company first fell from grace and then executed diligently on a difficult strategy, maintaining its dividend even under the toughest of times for profits. All the while, it had begun developing innovative drugs and making strong technology acquisitions.
Now my sense is completely different in its details, but somewhat similar in my current views. I suspect that the stock is ahead of itself in its valuation. The problem is that so is the general market (NYSEARCA:SPY) at 23-24X trailing EPS, and so are high quality bonds, etc. So I'm more toward the bullish side for BMY versus the market as a whole.
At BMY's pre-open price of $71.50, I think there are somewhat more attractive stocks in the biotech/biopharma field, simply for valuation and pipeline reasons. The chart is constructive. If you like to buy breakouts from a consolidation pattern with a cup and handle pattern, this may be your stock. But as truly great as Opdivo and Eliquis are, I just do not like to pay more than 25X current year projected EPS for a large company with lots of moving parts. After all, it will take Opdivo years to get to the sales and profitability levels that both Gilead's major product lines have reached - and look at GILD's P/E now that it has achieved its gigantic success.
In summary, BMY's broad early/mid-stage pipeline plus the unknown upside from Opdivo make it a very interesting play, and in my view, a very strong hold for satisfied existing shareholders. I expect a string of upside EPS surprises in the quarters ahead, and am looking for either a long term or trading entry point in this name.
Disclosure: I am/we are long GILD,REGN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.